Archives For Banking

In late August, Roberto Campos Neto, the head of Brazil’s central bank, is reported to have said about Pix, the bank’s two-year-old real-time-payments (RTP) system, that it “eliminates the need to have a credit card. I think that credit cards will cease to exist at some point soon.” Wow! Sounds amazing. A new system that does everything a credit card can do, but better.

As the old saying goes, however, something that sounds too good to be true probably isn’t. While Pix has some advantages, it also has many disadvantages. In particular, it lacks many of the features currently offered by credit cards, such as liability caps, fraud prevention, and—perhaps crucially—access to credit. So, it seems unlikely to replace credit cards any time soon.

Pix and the Unbanked

When Brazil’s central bank launched Pix in November 2020, evangelists at the bank hoped it would offer a low-cost alternative to existing payments and would entice some of the country’s tens of millions of unbanked and underbanked adults into the banking system. While Pix has, indeed, attracted many users, it has done little, if anything, to solve the problem of the unbanked.

Proponents of Pix asserted that the RTP system would dramatically reduce the number of unbanked individuals in Brazil. While it is true that many Brazilians who were previously unbanked do now have Pix accounts, it would be incorrect to conclude that Pix was the reason they ceased to be unbanked.

A study by Americas Market Intelligence (commissioned by Mastercard) found that, during the COVID-19 pandemic, “Brazil reduced its unbanked population by an astounding 73%.” But the study was based on research conducted between June and August 2020 and was published in October 2020, the month before Pix launched. It described the implementation of state and federal programs launched in Brazil in response to the pandemic:

  • The “Coronavoucher” program distributed emergency funds to low-income informal workers exclusively via state-owned bank Caixa Econômica Federal (CEF). Applications for funds could only be made via CEF’s Caixa Tem smartphone app, and funds were distributed via the same app. As of Aug. 5, 2020, 66 million people had received Coronavouchers via the Caix Tem app. Of those, 36 million were previously unbanked.
  • Merenda em Casa (“snack at home”), a program run by state governments, distributed funds to low-income families with children at public schools to help them pay for food while schools were closed due to COVID-19. The program distributed funds via PicPay and PagBank’s PagSeguro, both private-sector payment apps.

Following the launch of Pix, the central bank-run RTP program was made available to clients of Caixa Tem, PicPay, and PagBank. As a result, previously unbanked individuals who had become banked because of the Coronavoucher and Merenda em Casa programs were able to obtain and use Pix keys to send and receive payments.

It remains unclear, however, what proportion of those previously unbanked individuals actually use Pix. As Figure 1 below shows, the number of Pix keys registered vastly outstrips the number of users. As such, not only is it false to claim that Pix helped reduce the number of unbanked Brazilians, but it isn’t possible to say with certainty how many of those previously unbanked individuals are now active users of Pix.

FIGURE 1: Pix Keys Registered to Natural Persons and Pix Users Who Are Natural Persons

Pix-Created Problems

Pix suffered a series of data breaches this past year, with the end result that details of Pix accounts were stolen from more than 500,000 account holders. Meanwhile, hackers have set up fake apps designed to steal money from users’ bank accounts by masquerading as legitimate Pix-compliant wallets. And Pix has been associated with a rise in lightning kidnappings, whereby kidnappers force their victims to make a transfer on Pix in order to be released.

Faced with the problem that they cannot avoid having Pix because their banks have automatically enabled the system, some Brazilians have responded to the threat of kidnappings by purchasing second “Pix phones.” Users load these mid-range Android phones with banking and Pix apps and leave them at home. Meanwhile, they delete all banking apps from their primary phone. While such an approach ostensibly prevents criminals from stealing potentially large amounts of money from individuals who can afford to have a second phone, it is quite a costly and inconvenient solution.

Pix vs Credit Cards

Roberto Campos Neto reportedly conceded that Pix data breaches will occur “with some frequency.” This acknowledgment of Pix’s unresolved security issues is difficult to square with the central bank president’s claim that the service will soon replace credit cards. After all, the major credit-card networks (Visa, Mastercard, American Express, and Discover) have more than half a century of experience managing fraud, and have built massive artificial-intelligence-based systems to identify and prevent potentially fraudulent transactions. Pix has no such system. Credit-card networks have also developed a highly effective system for challenging fraudulent transactions called “chargebacks.”

Card networks’ investment in fraud management has enabled them to offer “zero liability” terms to cardholders, which has made credit cards attractive as a means of paying for goods and services, both at brick-and-mortar locations and online. While Pix now has a system to reverse fraudulent transactions, its reliability has yet to be tested, and Pix as yet does not offer zero liability. Thus, given the choice between a credit card and Pix, users are unlikely to use Pix to pay for goods where there is a risk that the business will fail to deliver goods or services as promised.  

Finally, credit cards offer users the ability to defer payment for no fee until their next bill becomes due (usually at least a month). And they offer the ability to defer payment for longer, if necessary, with interest payable on the amount outstanding.

Conclusion: There Ain’t No Such Thing as a Free Lunch

The investments that credit-card networks have made in the identification, prevention, and rectification of fraud have been possible because they are able to charge a (very small) fee to process transactions. Pix also charges merchants a small fee for transactions but, as noted, it is not able to offer the same protections.

Most Pix transactions to date have been person-to-person (P2P), effectively replacing transactions that would have otherwise been made with cash, checks, or online bank-to-bank funds transfers. That makes sense when one thinks about the risks involved. P2P transactions are likely to involve parties that know one another and/or are engaged in repeat business. By contrast, many consumer-to-business and business-to-business transactions involve parties that are relatively less well-known to one another and thus have more incentive to renege on commitments. Consumers are therefore more inclined to use the payment system with protections built in, while merchants—who are happy for the additional business—are willing to pay the price for that business.

The science-fiction writer Robert Heinlein popularized a pithy phrase to describe the idea that it is not possible to get something for nothing: “There Ain’t No Such Thing as a Free Lunch.” If Pix is to challenge credit cards as a real consumer-payments system, it will have to offer similar levels of fraud protection to consumers. That will not be cheap. While the central bank might continue to subsidize Pix transactions, doing so to the degree that would be necessary to offer such fraud protections would be an abuse of its position. Thinking otherwise is science fiction.

European Union lawmakers appear close to finalizing a number of legislative proposals that aim to reform the EU’s financial-regulation framework in response to the rise of cryptocurrencies. Prominent within the package are new anti-money laundering and “countering the financing of terrorism” rules (AML/CFT), including an extension of the so-called “travel rule.” The travel rule, which currently applies to wire transfers managed by global banks, would be extended to require crypto-asset service providers to similarly collect and make available details about the originators and beneficiaries of crypto-asset transfers.

This legislative process proceeded with unusual haste in recent months, which partially explains why legal objections to the proposals have not been adequately addressed. The resulting legislation is fundamentally flawed to such an extent that some of its key features are clearly invalid under EU primary (treaty) law and liable to be struck down by the Court of Justice of the European Union (CJEU). 

In this post, I will offer a brief overview of some of the concerns, which I also discuss in this recent Twitter thread. I focus primarily on the travel rule, which—in the light of EU primary law—constitutes a broad and indiscriminate surveillance regime for personal data. This characterization also applies to most of AML/CFT.

The CJEU, the EU’s highest court, established a number of conditions that such legally mandated invasions of privacy must satisfy in order to be valid under EU primary law (the EU Charter of Fundamental Rights). The legal consequences of invalidity are illustrated well by the Digital Rights Ireland judgment, in which the CJEU struck down an entire piece of EU legislation (the Data Retention Directive). Alternatively, the CJEU could decide to interpret EU law as if it complied with primary law, even if that is contrary to the text.

The Travel Rule in the Transfer of Funds Regulation

The EU travel rule is currently contained in the 2015 Wire Transfer Regulation (WTR). But at the end of June, EU legislators reached a likely final deal on its replacement, the Transfer of Funds Regulation (TFR; see the original proposal from July 2021). I focus here on the TFR, but much of the argument also applies to the older WTR now in force. 

The TFR imposes obligations on payment-system providers and providers of crypto-asset transfers (refer to here, collectively, as “service providers”) to collect, retain, transfer to other service providers, and—in some cases—report to state authorities:

…information on payers and payees, accompanying transfers of funds, in any currency, and the information on originators and beneficiaries, accompanying transfers of crypto-assets, for the purposes of preventing, detecting and investigating money laundering and terrorist financing, where at least one of the payment or crypto-asset service providers involved in the transfer of funds or crypto-assets is established in the Union. (Article 1 TFR)

The TFR’s scope extends to money transfers between bank accounts or other payment accounts, as well as transfers of crypto assets other than peer-to-peer transfers without the involvement of a service provider (Article 2 TFR). Hence, the scope of the TFR includes, but is not limited to, all those who send or receive bank transfers. This constitutes the vast majority of adult EU residents.

The information that service providers are obligated to collect and retain (under Articles 4, 10, 14, and 21 TFR) include data that allow for the identification of both sides of a transfer of funds (the parties’ names, as well as the address, country, official personal document number, customer identification number, or the sender’s date and place of birth) and for linking their identity with the (payment or crypto-asset) account number or crypto-asset wallet address. The TFR also obligates service providers to collect and retain additional data to verify the accuracy of the identifying information “on the basis of documents, data or information obtained from a reliable and independent source” (Articles 4(4), 7(3), 14(5), 16(2) TFR). 

The scope of the obligation to collect and retain verification data is vague and is likely to lead service providers to require their customers to provide copies of passports, national ID documents, bank or payment-account statements, and utility bills, as is the case under the WTR and the 5th AML Directive. Such data is overwhelmingly likely to go beyond information on the civil identity of customers and will often, if not almost always, allow inferring even sensitive personal data about the customer.

The data-collection and retention obligations in the TFR are general and indiscriminate. No distinction is made in TFR’s data-collection and retention provisions based on likelihood of a connection with criminal activity, except for verification data in the case of transfers of funds (an exception not applicable to crypto assets). Even, the distinction in the case of verification data for transfers of funds (“has reasonable grounds for suspecting money laundering or terrorist financing”) arguably lacks the precision required under CJEU case law.

Analogies with the CJEU’s Passenger Name Records Decision

In late June, following its established approach in similar cases, the CJEU gave its judgment in the Ligue des droits humains case, which challenged the EU and Belgian regimes on passenger name records (PNR). The CJEU decided there that the applicable EU law, the PNR Directive, is valid under EU primary law. But it reached that result by interpreting some of the directive’s provisions in ways contrary to their express language and by deciding that some national legal rules implementing the directive are invalid. Some features of the PNR regime that were challenged by the court are strikingly similar to the TFR regime.

First, just like the TFR, the PNR rules imposed a five-year data-retention period for the data of all passengers, even where there is no “objective evidence capable of establishing a risk that relates to terrorist offences or serious crime having an objective link, even if only an indirect one, with those passengers’ air travel.” The court decided that this was a disproportionate restriction of the rights to privacy and to the protection of personal data under Articles 5-7 of the EU Charter of Fundamental Rights. Instead of invalidating the relevant article of the PNR Directive, the CJEU reinterpreted it as if it only allowed for five-year retention in cases where there is evidence of a relevant connection to criminality.

Applying analogous reasoning to the TFR, which imposes an indiscriminate five-year data retention period in its Article 21, the conclusion must be that this TFR provision is invalid under Articles 7-8 of the charter. Article 21 TFR may, at minimum, need to be recast to apply only to that transaction data where there is “objective evidence capable of establishing a risk” that it is connected to serious crime. The court also considered the issue of government access to data that has already been collected. Under the CJEU’s established interpretation of the EU Charter, “it is essential that access to retained data by the competent authorities be subject to a prior review carried out either by a court or by an independent administrative body.” In the PNR regime, at least some countries (such as Belgium) assigned this role to their “passenger information units” (PIUs). The court noted that a PIU is “an authority competent for the prevention, detection, investigation and prosecution of terrorist offences and of serious crime, and that its staff members may be agents seconded from the competent authorities” (e.g. from police or intelligence authorities). But according to the court:

That requirement of independence means that that authority must be a third party in relation to the authority which requests access to the data, in order that the former is able to carry out the review, free from any external influence. In particular, in the criminal field, the requirement of independence entails that the said authority, first, should not be involved in the conduct of the criminal investigation in question and, secondly, must have a neutral stance vis-a-vis the parties to the criminal proceedings …

The CJEU decided that PIUs do not satisfy this requirement of independence and, as such, cannot decide on government access to the retained data.

The TFR (especially its Article 19 on provision of information) does not provide for prior independent review of access to retained data. To the extent that such a review is conducted by Financial Intelligence Units (FIUs) under the AML Directive, concerns arise very similar to the treatment of PIUs under the PNR regime. While Article 32 of the AML Directive requires FIUs to be independent, that doesn’t necessarily mean that they are independent in the ways required of the authority that will decide access to retained data under Articles 7-8 of the EU Charter. For example, the AML Directive does not preclude the possibility of seconding public prosecutors, police, or intelligence officers to FIUs.

It is worth noting that none of the conclusions reached by the CJEU in the PNR case are novel; they are well-grounded in established precedent. 

A General Proportionality Argument

Setting aside specific analogies with previous cases, the TFR clearly has not been accompanied by a more general and fundamental reflection on the proportionality of its basic scheme in the light of the EU Charter. A pressing question is whether the TFR’s far-reaching restrictions of the rights established in Articles 7-8 of the EU Charter (and perhaps other rights, like freedom of expression in Article 11) are strictly necessary and proportionate. 

Arguably, the AML/CFT regime—including the travel rule—are significantly more costly and more rights-restricting than potential alternatives. The basic problem is that there is no reliable data on the relative effectiveness of measures like the travel rule. Defenders of the current AML/CFT regime focus on evidence that it contributes to preventing or prosecuting some crime. But this is not the relevant question when it comes to proportionality. The relevant question is whether those measures are as effective or more effective than alternative, less costly, and more privacy-preserving alternatives. One conservative estimate holds that AML compliance costs in Europe were “120 times the amount successfully recovered from criminals’ and exceeded the estimated total of criminal funds (including funds not seized or identified).” 

The fact that the current AML/CFT regime is a de facto global standard cannot serve as a sufficient justification either, given that EU fundamental law is perfectly comfortable in rejecting non-European law-enforcement practices (see the CJEU’s decision in Schrems). The travel rule has been unquestioningly imported to EU law from U.S. law (via FATF), where the standards of constitutional protection of privacy are much different than under the EU Charter. This fact would likely be noticed by the Court of Justice in any putative challenge to the TFR or other elements of the AML/CFT regime. 

Here, I only flag the possibility of a general proportionality challenge. Much more work needs to be done to flesh it out.

Conclusion

Due to the political and resource constraints of the EU legislative process, it is possible that the legislative proposals in the financial-regulation package did not receive sufficient legal scrutiny from the perspective of their compatibility with the EU Charter of Fundamental Rights. This hypothesis would explain the presence of seemingly clear violations, such as the indiscriminate five-year data-retention period. Given that none of the proposals has, as yet, been voted into law, making the legislators aware of the problem may help to address at least some of the issues.

Legal arguments about the AML/CFT regime’s incompatibility with the EU Charter should be accompanied with concrete alternative proposals to achieve the goals of preventing and combating serious crime that, according to the best evidence, the current AML/CFT regime does ineffectively. We need more regulatory imagination. For example, one part of the solution may be to properly staff and equip government agencies tasked with prosecuting financial crime.

But it’s also possible that the proposals, including the TFR, will be adopted broadly without amendment. In that case, the main recourse available to EU citizens (or to any EU government) will be to challenge the legality of the measures before the Court of Justice.

Banco Central do Brasil (BCB), Brazil’s central bank, launched a new real-time payment (RTP) system in November 2020 called Pix. Evangelists at the central bank hoped that Pix would offer a low-cost alternative to existing payments systems and would entice some of the country’s tens of millions of unbanked and underbanked adults into the banking system.

A recent review of Pix, published by the Bank for International Settlements, claims that the payment system has achieved these goals and that it is a model for other jurisdictions. However, the BIS review seems to have been written with rose-tinted spectacles. This is perhaps not surprising, given that the lead author runs the division of the central bank that developed Pix. In a critique published this week, I suggest that, when seen in full color, Pix looks a lot less pretty. 

Among other things, the BIS review misconstrues the economics of payment networks. By ignoring the two-sided nature of such networks, the authors claim erroneously that payment cards incur a net economic cost. In fact, evidence shows that payment cards generate net benefits. One study put their value add to the Brazilian economy at 0.17% of GDP. 

The report also obscures the costs of the Pix system and fails to explain that, whereas private payment systems must recover their full operational cost, Pix appears to benefit from both direct and indirect subsidies. The direct subsidies come from the BCB, which incurred substantial costs in developing and promoting Pix and, unlike other central banks such as the U.S. Federal Reserve, is not required to recover all operational costs. Indirect subsidies come from the banks and other payment-service providers (PSPs), many of which have been forced by the BCB to provide Pix to their clients, even though doing so cannibalizes their other payment systems, including interchange fees earned from payment cards. 

Moreover, the BIS review mischaracterizes the role of interchange fees, which are often used to encourage participation in the payment-card network. In the case of debit cards, this often includes covering some or all of the operational costs of bank accounts. The availability of “free” bank accounts with relatively low deposit requirements offers customers incentives to open and maintain accounts. 

While the report notes that Pix has “signed up” 67% of adult Brazilians, it fails to mention that most of these were automatically enrolled by their banks, the majority of which were required by the BCB to adopt Pix. It also fails to mention that 33% of adult Brazilians have not “signed up” to Pix, nor that a recent survey found that more than 20% of adult Brazilians remain unbanked or underbanked, nor that the main reason given for not having a bank account was the cost of such accounts. Moreover, by diverting payments away from debit cards, Pix has reduced interchange fees and thereby reduced the ability of banks and other PSPs to subsidize bank accounts, which might otherwise have increased financial inclusion.  

The BIS review falsely asserts that “Big Tech” payment networks are able to establish and maintain market power. In reality, tech firms operate in highly competitive markets and have little to no market power in payment networks. Nonetheless, the report uses this claim regarding Big Tech’s alleged market power to justify imposing restrictions on the WhatsApp payment system. The irony, of course, is that by moving to prohibit the WhatsApp payment service shortly before the rollout of Pix, the BCB unfairly inhibited competition, effectively giving Pix a monopoly on RTP with the full support of the government. 

In acting as both a supplier of a payment service and the regulator of payment service providers, the BCB has a massive conflict of interest. Indeed, the BIS itself has recommended that, in cases where such conflicts might exist, it is good practice to ensure that the regulator is clearly separated from the supplier. Pix, in contrast, was developed and promoted by the same part of the bank as the payments regulator. 

Finally, the BIS report also fails to address significant security issues associated with Pix, including a dramatic rise in the number of “lightning kidnappings” in which hostages were forced to send funds to Pix addresses. 

[Today’s guest post—the 11th entry in our FTC UMC Rulemaking symposium—comes from Ramsi A. Woodcock of the University of Kentucky’s Rosenberg College of Law. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In an effort to fight inflation, the Federal Open Market Committee raised interest rates to 20% over the course of 1980 and 1981, triggering a recession that threw more than 4 million Americans, many in well-paying manufacturing jobs, out of work.

As it continues to do today, the committee met in secret and explained its rate decisions in a handful of paragraphs.

None of the millions of Americans thrown out of work—or the many businesses driven to bankruptcy—sued the FOMC. No one argued that the FOMC’s power to disrupt the American economy was an unconstitutional delegation of legislative authority. No one argued that, in adopting its rate decisions, the FOMC had failed to comply with any of the notice-and-comment procedures required by the Administrative Procedure Act (APA).

They were wise not to sue, because they would have lost.

There have been only five lawsuits against the FOMC since it was created in 1933. All have failed; none has challenged a FOMC rate decision.

As Judge Augustus Hand put it in a related case: “it would be an unthinkable burden upon any banking system if its open market sales and discount rates were to be subject to judicial review.”

Even if everything Frank Easterbrook has had to say about antitrust is correct, it is unlikely that the Federal Trade Commission (FTC) could ever trigger a recession, much less one as severe as the one the FOMC created 40 years ago. And yet, no FTC commissioner can dream of the agency enjoying anything like the level of deference from the courts enjoyed by the FOMC.

The reality of FTC practice is just too depressing.

The FTC Act of 1914 is an expression of profound ambivalence about the administrative project, denying to the FTC even the authority to carry out internal deliberations other than through an adjudicative process. The FTC must bring an administrative complaint; firms have the right to a hearing; and so on. A Congress that would do that to an agency would certainly subject the agency’s final decisions to review by the federal courts—which, of course, Congress did.

Unlike their francophone peers on the European Court of Justice (ECJ), who have leveraged a culture of judicial deference to administrative action—as well as the fact that the ECJ’s language of business is their native tongue—to give the European Union’s antitrust agency something like carte blanche, American judges have delighted at using their powers to humiliate the FTC.

Take pay-for-delay. The FTC—informed by a staff of 80 PhD economists, not all Democrats—declared the practice to be bad for consumers in the late 1990s. But several courts actually decided that the practice was so good for consumers that it should be per se legal instead. It took more than a decade of litigation before the FTC was able to make a dent in the rate of accumulation of these agreements.

So whipped is the FTC by the courts that even when it dreams of a better life, the commission seems unable to imagine one without judicial review. During a period when bipartisan groups of legislators are seeking to reform the antitrust laws, one might have hoped that the FTC would ask for some of the discretion enjoyed by the FOMC.

Instead, the FTC’s current leadership appears intent to strap the FTC into the straightjacket of notice-and-comment rulemaking under the APA, which will only extend the FTC’s subjugation to the courts.

Indeed, progressives understood the passage of the APA in 1946 to be a signal defeat, clawing back power for the courts that progressives had fought for two generations to lodge in administrative agencies. The act was literally adopted over FDR’s dead body—he vetoed its forerunner in 1940 and died in 1945. It is consistent with contemporary progressives’ habit of mistaking counterproductive, middle-of-the-road policies for radical interventions (the original progressives of a century ago didn’t think much of the entire antitrust enterprise, either), that they should mistake the APA’s notice-and-comment rulemaking for a recipe for FTC invigoration.

To be sure, the issuance of competition regulations would be a new thing for the FTC. Rather than just enforce existing antitrust rules (and fantasizing that, one day, a court might read the FTC’s power to condemn “unfair methods of competition” more broadly), the FTC would be able actually to make new antitrust law.

But law is a double-edged sword for an administrative agency. It binds the public, but it also binds the agency. Any rule the FTC seeks to adopt, the FTC itself must follow; if a defendant can show that the firm complied, the FTC loses its case.

And that’s after the FTC has made it through the hell of the rulemaking process itself—the notice-and-comment periods, the court challenges to the agency’s interpretation of every point of process, along with the substantive basis for the rule—for every single rule the agency wishes to adopt. Or  to repeal.

The FOMC suffers no such indignities.

Although Congress calls the FOMC’s decisions “regulations,” they are not subject to the APA. The FOMC can make a rate decision and then change its mind whenever and however it wishes. The FOMC does not need to provide the public with notice and an opportunity to comment—indeed, the FOMC waits five years to release transcripts of its deliberations—and its decisions are never reviewed, even for caprice.

If the FTC wanted real power—if it wanted to get something done—it would want discretion. Discretion has made the FOMC nimble and being nimble has made the FOMC effective. Economists agree that the FOMC’s rate decisions slew inflation in the early 1980s; it could not have done that if, like the FTC and pay-for-delay, it had had to wait a decade for the courts’ approval.

As Judge Hand put it, “the correction of discount rates by judicial decree seems almost grotesque, when we remember that conditions in the money market often change from hour to hour, and the disease would ordinarily be over long before a judicial diagnosis could be made.”

How strange it is to read this as an antitrust scholar and reflect that the single most important attack on antitrust enforcement has always been, in Judge Hand’s words, that “the disease [is] ordinarily … over long before a judicial diagnosis [is] made.”

Is that not the lesson drawn by antitrust’s critics from the Microsoft litigation? Microsoft may well have monopolized operating systems in 1992 or 1994. But by the time the case settled in 2001, Windows’ dominance could not be rolled back. America was already used to a single operating system, a single Office suite, and so on. And mobile, which Microsoft did not dominate, was on the horizon. If there had been a time when antitrust enforcers could have done something to promote competition, it had passed.

Or AT&T. Antitrust managed to break the company up just in time for the cell-phone revolution to render its decades-old landline monopoly irrelevant.

If, as Judge Hand observed, “conditions in the money market change from hour to hour,” so too do conditions in virtually every market—including the markets that the FTC regulates. If that is the argument for FOMC discretion, it is an equally potent argument for FTC discretion.

But to get power, you have to want it, and the current leadership cries out instead only for a more varied servitude.

The case for instead making the FTC more like the FOMC is strong. (Even the name fits.)

Both institutions are charged with using indirect methods to get prices right in fluid market environments—the FOMC by using the purchase and sale of securities to get interest rates right; the FTC by tweaking market structure to get market prices to competitive levels. As has already been observed, this can be done effectively only through the unfettered exercise of administrative discretion.

Independence from all three branches of government (including the courts) is essential to both. Just as an accountable FOMC would probably not have had the will to throw millions out of work and drive many businesses into bankruptcy in order to fight inflation—even though that was ultimately best for the economy—an accountable FTC cannot embark on a campaign of economy-wide deconcentration when that is the right thing for the economy (which is not to say that it always is).

The sort of systemic regulation of the preconditions for a successful capitalism in which both the FOMC and the FTC are engaged creates too many powerful winners and losers for either institution to be able to do its job without complete and utter discretion to act as it sees fit—something the FTC lacks.

Indeed, the last time the FTC tried to flex its muscles, it was smacked down by all three branches of government—attacked by both Jimmy Carter and Ronald Reagan from the campaign trail, threatened with defunding by Congress, and rejected by the courts.

One can distinguish the FOMC from the FTC on the grounds that the FOMC paints with a broader brush than does the FTC. To get interest rates right, the FOMC directs the purchase and sale of securities, often in great volumes, whereas the FTC may need to tell a single, identifiable company how to do a particular, identifiable thing, such as to distribute a particular input on reasonable terms or to excise a particular provision from its contracts. Because of the potential for abuse of the individual that might result from such individualized action, the argument goes, the courts must keep the FTC on a tighter leash.

There is a fictional premise here. The FTC rarely deals with individuals—flesh-and-blood humans—but instead with corporations, often so large that they have thousands of workers and managers, and still more shareholders. The potential for abuse of actual individuals, as opposed to the fictive corporate individual, is low.

But even if we accept this fiction—as, alas, the courts have done—the FTC differs from the FOMC here only because it has so far adhered to an adjudicatory model of decisionmaking. The FTC could, for example, decide instead to target competitive prices by ordering every firm in the economy having an accounting profit in excess of 15% to be broken up, along the lines of the Industrial Reorganization Act considered by Congress in the 1970s.

That would paint with a brush of FOMCian breadth. Indeed, by varying the triggering profit percentage, the FTC would be able to vary, in a rough way, the level of competition and hence the level of prices in the economy, just as, by varying its target interest rate, the FOMC varies, in a rough way, the level of inflation in the economy.

(I do not mean to suggest an equivalence between monopoly pricing and inflation; monopoly pricing is a problem of levels whereas inflation is a problem of rates of change; they are two different problems with two different causes, two different institutions to mind them, and two different fixes.)

And although such a broad approach would surely send copious “good” firms that have engaged in no monopolizing activities to their fates, the FOMC’s rate increases doubtless also send to their fates plenty of “good” firms that have not inflated their prices but cannot survive at a 20% cost of capital. The FOMC does that because it is more expedient to discipline every firm than to identify the inflators and coax them into altering their behavior on a case-by-case basis.

We tolerate this sacrifice of innocents because we believe that low inflation confers long-term gains on everyone. If we believe that competitive pricing confers long-term gains on everyone—and that is the premise of competition policy—surely we must tolerate the same from the FTC.

If anything, the case for a broad-brush FTC is stronger than that for the FOMC, because, as already noted, no matter how overzealous the deconcentration program, it is hard to imagine deconcentration plunging the economy into recession and throwing millions of Americans out of work, at least in the short run.

If anything, deconcentration should raise employment, because competition is wasteful and duplicative; all those shards of big firms need their own independent support staffs. And, of course, it is a staple of antitrust theory that when competition increases, output goes up, not down.

One might also seek to distinguish between the FOMC and the FTC on the grounds that what the FTC must do is more complicated, and hence more prone to error, than what the FOMC must do, making oversight more appropriate for the FTC. Both inflation and monopoly power are bad for growth, the argument might go, but the connection between inflation and growth is clear whereas that between monopoly power and growth—not so much.

Indeed, too much inflation prevents firms from planning and, so, from innovating. But while the adversity associated with competition is the mother of invention, many innovations—such as social networks—can be delivered only at scale, suggesting that too much competition can be as bad for growth as too little. It would seem to follow that getting monetary policy right is easy, whereas getting competition policy right is hard.

Except that the FOMC must strike a balance between too much inflation and too little, just as the FTC must strike a balance between too much competition and too little.

Deflation can be just as bad for growth—just as hard on business planning—as inflation, as any Japanese central banker of the previous generation can tell you. The FOMC must, therefore, find the interest rates that produce neither too much nor too little inflation, just as the FTC must find the level of concentration that produces neither too much nor too little competition.

Both the FOMC and the FTC have hard jobs. Why do we trust one to handle its job better than the other?

One reason might be that the FOMC is a friend to big business whereas the FTC is a natural enemy thereof. Inflation, when unexpected, levels, because it reduces the real value of debts. If firms tend to be creditors and consumers debtors, and firms’ shareholders tend to be richer than consumers, the wealth gap narrows.

It follows that, in preventing inflation, the FOMC tilts, and so big business wants the FOMC healthy and free. The FTC, by contrast, levels, because it eliminates monopoly profits, benefiting consumers at the expense of shareholders. So, big business prefers the FTC shackled.

If that is right, then the FOMC enjoys a level of discretion that the FTC never can, because the power behind government never will give the FTC so loose a leash. Congress has authorized both the FOMC and the FTC to create regulations. But the courts would never interpret this language consistently; for the FOMC, to “adopt” a “regulation” means to do whatever you like whereas for the FTC to “make” a “regulation” means either nothing at all or, at best, notice-and-comment rulemaking under the APA.

But I rather think there is a better explanation for the divergent experiences of the FOMC and the FTC, one that does not turn on class conflict and which has been staring us in the face all along.

Just as competition policy probably cannot cause a recession or throw millions of Americans out of work, it probably cannot much increase growth or employ many more Americans either. The future of an economy may be decided by the variance of an interest rate between 0% and 20%; this is not so for the variance of a market price between the competitive level and the monopoly level. The FOMC is simply more important to the success of the capitalist system than is the FTC.

And both are probably not that important for economic inequality. While unexpected inflation does tend to make debts go away, firms rewrite contracts to account for expected inflation, so inflation’s contribution to equality is blip-like.

The contribution of monopoly profits to inequality is also likely to be small; scarcity profits, which firms generate even in competitive markets, are likely to play a more important role. At least, that’s what Thomas Piketty, the dean of inequality studies, happens to think.

And maybe also what the rich think: there is conservative support for more competition policy, but none for more tax policy, which tells us something about which is likely to have a more radical impact on the distribution of wealth.

So, it is because the FTC is not dangerous, rather than because it is dangerous, that we feel free to hobble it with process. And because the FOMC is dangerous that we want it free and maximally effective.

Just so, there is no due process in wartime because there is so much at stake, whereas in peacetime you can’t kill a statue without multiple appeals.

Which takes us back to the real deficit in progressive radicalism. Yes, rulemaking for the FTC is a cop out.

But so is the entire antitrust project.

[Judge Douglas Ginsburg was invited to respond to the Beesley Lecture given by Andrea Coscelli, chief executive of the U.K. Competition and Markets Authority (CMA). Both the lecture and Judge Ginsburg’s response were broadcast by the BBC on Oct. 28, 2021. The text of Mr. Coscelli’s Beesley lecture is available on the CMA’s website. Judge Ginsburg’s response follows below.]

Thank you, Victoria, for the invitation to respond to Mr. Coscelli and his proposal for a legislatively founded Digital Markets Unit. Mr. Coscelli is one of the most talented, successful, and creative heads a competition agency has ever had. In the case of the DMU [ed., Digital Markets Unit], however, I think he has let hope triumph over experience and prudence. This is often the case with proposals for governmental reform: Indeed, it has a name, the Nirvana Fallacy, which comes from comparing the imperfectly functioning marketplace with the perfectly functioning government agency. Everything we know about the regulation of competition tells us the unintended consequences may dwarf the intended benefits and the result may be a less, not more, competitive economy. The precautionary principle counsels skepticism about such a major and inherently risky intervention.

Mr. Coscelli made a point in passing that highlights the difference in our perspectives: He said the SMS [ed., strategic market status] merger regime would entail “a more cautious standard of proof.” In our shared Anglo-American legal culture, a more cautious standard of proof means the government would intervene in fewer, not more, market activities; proof beyond a reasonable doubt in criminal cases is a more cautious standard than a mere preponderance of the evidence. I, too, urge caution, but of the traditional kind.

I will highlight five areas of concern with the DMU proposal.

I. Chilling Effects

The DMU’s ability to designate a firm as being of strategic market significance—or SMS—will place a potential cloud over innovative activity in far more sectors than Mr. Coscelli could mention in his lecture. He views the DMU’s reach as limited to a small number of SMS-designated firms; and that may prove true, but there is nothing in the proposal limiting DMU’s reach.

Indeed, the DMU’s authority to regulate digital markets is surely going to be difficult to confine. Almost every major retail activity or consumer-facing firm involves an increasingly significant digital component, particularly after the pandemic forced many more firms online. Deciding which firms the DMU should cover seems easy in theory, but will prove ever more difficult and cumbersome in practice as digital technology continues to evolve. For instance, now that money has gone digital, a bank is little more than a digital platform bringing together lenders (called depositors) and borrowers, much as Amazon brings together buyers and sellers; so, is every bank with market power and an entrenched position to be subject to rules and remedies laid down by the DMU as well as supervision by the bank regulators? Is Aldi in the crosshairs now that it has developed an online retail platform? Match.com, too? In short, the number of SMS firms will likely grow apace in the next few years.

II. SMS Designations Should Not Apply to the Whole Firm

The CMA’s proposal would apply each SMS designation firm-wide, even if the firm has market power in a single line of business. This will inhibit investment in further diversification and put an SMS firm at a competitive disadvantage across all its businesses.

Perhaps company-wide SMS designations could be justified if the unintended costs were balanced by expected benefits to consumers, but this will not likely be the case. First, there is little evidence linking consumer harm to lines of business in which large digital firms do not have market power. On the contrary, despite the discussion of Amazon’s supposed threat to competition, consumers enjoy lower prices from many more retailers because of the competitive pressure Amazon brings to bear upon them.

Second, the benefits Mr. Coscelli expects the economy to reap from faster government enforcement are, at best, a mixed blessing. The proposal, you see, reverses the usual legal norm, instead making interim relief the rule rather than the exception. If a firm appeals its SMS designation, then under the CMA’s proposal, the DMU’s SMS designations and pro-competition interventions, or PCIs, will not be stayed pending appeal, raising the prospect that a firm’s activities could be regulated for a significant period even though it was improperly designated. Even prevailing in the courts may be a Pyrrhic victory because opportunities will have slipped away. Making matters worse, the DMU’s designation of a firm as SMS will likely receive a high degree of judicial deference, so that errors may never be corrected.

III. The DMU Cannot Be Evidence-based Given its Goals and Objectives

The DMU’s stated goal is to “further the interests of consumers and citizens in digital markets by promoting competition and innovation.”[1] DMU’s objectives for developing codes of conduct are: fair trading, open choices, and trust and transparency.[2] Fairness, openness, trust, and transparency are all concepts that are difficult to define and probably impossible to quantify. Therefore, I fear Mr. Coscelli’s aspiration that the DMU will be an evidence-based, tailored, and predictable regime seem unrealistic. The CMA’s idea of “an evidence-based regime” seems destined to rely mostly upon qualitative conjecture about the potential for the code of conduct to set “rules of the game” that encourage fair trading, open choices, trust, and transparency. Even if the DMU commits to considering empirical evidence at every step of its process, these fuzzy, qualitative objectives will allow it to come to virtually any conclusion about how a firm should be regulated.

Implementing those broad goals also throws into relief the inevitable tensions among them. Some potential conflicts between DMU’s objectives for developing codes of conduct are clear from the EU’s experience. For example, one of the things DMU has considered already is stronger protection for personal data. The EU’s experience with the GDPR shows that data protection is costly and, like any costly requirement, tends to advantage incumbents and thereby discourage new entry. In other words, greater data protections may come at the expense of start-ups or other new entrants and the contribution they would otherwise have made to competition, undermining open choices in the name of data transparency.

Another example of tension is clear from the distinction between Apple’s iOS and Google’s Android ecosystems. They take different approaches to the trade-off between data privacy and flexibility in app development. Apple emphasizes consumer privacy at the expense of allowing developers flexibility in their design choices and offers its products at higher prices. Android devices have fewer consumer-data protections but allow app developers greater freedom to design their apps to satisfy users and are offered at lower prices. The case of Epic Games v. Apple put on display the purportedly pro-competitive arguments the DMU could use to justify shutting down Apple’s “walled garden,” whereas the EU’s GDPR would cut against Google’s open ecosystem with limited consumer protections. Apple’s model encourages consumer trust and adoption of a single, transparent model for app development, but Google’s model encourages app developers to choose from a broader array of design and payment options and allows consumers to choose between the options; no matter how the DMU designs its code of conduct, it will be creating winners and losers at the cost of either “open choices” or “trust and transparency.” As experience teaches is always the case, it is simply not possible for an agency with multiple goals to serve them all at the same time. The result is an unreviewable discretion to choose among them ad hoc.

Finally, notice that none of the DMU’s objectives—fair trading, open choices, and trust and transparency—revolves around quantitative evidence; at bottom, these goals are not amenable to the kind of rigor Mr. Coscelli hopes for.

IV. Speed of Proposals

Mr. Coscelli has emphasized the slow pace of competition law matters; while I empathize, surely forcing merging parties to prove a negative and truncating their due process rights is not the answer.

As I mentioned earlier, it seems a more cautious standard of proof to Mr. Coscelli is one in which an SMS firm’s proposal to acquire another firm is presumed, or all but presumed, to be anticompetitive and unlawful. That is, the DMU would block the transaction unless the firms can prove their deal would not be anticompetitive—an extremely difficult task. The most self-serving version of the CMA’s proposal would require it to prove only that the merger poses a “realistic prospect” of lessening competition, which is vague, but may in practice be well below a 50% chance. Proving that the merged entity does not harm competition will still require a predictive forward-looking assessment with inherent uncertainty, but the CMA wants the costs of uncertainty placed upon firms, rather than it. Given the inherent uncertainty in merger analysis, the CMA’s proposal would pose an unprecedented burden of proof on merging parties.

But it is not only merging parties the CMA would deprive of due process; the DMU’s so-called pro-competitive interventions, or PCI, SMS designations, and code-of-conduct requirements generally would not be stayed pending appeal. Further, an SMS firm could overturn the CMA’s designation only if it could overcome substantial deference to the DMU’s fact-finding. It is difficult to discern, then, the difference between agency decisions and final orders.

The DMU would not have to show or even assert an extraordinary need for immediate relief. This is the opposite of current practice in every jurisdiction with which I am familiar.  Interim orders should take immediate effect only in exceptional circumstances, when there would otherwise be significant and irreversible harm to consumers, not in the ordinary course of agency decision making.

V. Antitrust Is Not Always the Answer

Although one can hardly disagree with Mr. Coscelli’s premise that the digital economy raises new legal questions and practical challenges, it is far from clear that competition law is the answer to them all. Some commentators of late are proposing to use competition law to solve consumer protection and even labor market problems. Unfortunately, this theme also recurs in Mr. Coscelli’s lecture. He discusses concerns with data privacy and fair and reasonable contract terms, but those have long been the province of consumer protection and contract law; a government does not need to step in and regulate all realms of activity by digital firms and call it competition law. Nor is there reason to confine needed protections of data privacy or fair terms of use to SMS firms.

Competition law remedies are sometimes poorly matched to the problems a government is trying to correct. Mr. Coscelli discusses the possibility of strong interventions, such as forcing the separation of a platform from its participation in retail markets; for example, the DMU could order Amazon to spin off its online business selling and shipping its own brand of products. Such powerful remedies can be a sledgehammer; consider forced data sharing or interoperability to make it easier for new competitors to enter. For example, if Apple’s App Store is required to host all apps submitted to it in the interest of consumer choice, then Apple loses its ability to screen for security, privacy, and other consumer benefits, as its refusal   to deal is its only way to prevent participation in its store. Further, it is not clear consumers want Apple’s store to change; indeed, many prefer Apple products because of their enhanced security.

Forced data sharing would also be problematic; the hiQ v. LinkedIn case in the United States should serve as a cautionary tale. The trial court granted a preliminary injunction forcing LinkedIn to allow hiQ to scrape its users’ profiles while the suit was ongoing. LinkedIn ultimately won the suit because it did not have market power, much less a monopoly, in any relevant market. The court concluded each theory of anticompetitive conduct was implausible, but meanwhile LinkedIn had been forced to allow hiQ to scrape its data for an extended period before the final decision. There is no simple mechanism to “unshare” the data now that LinkedIn has prevailed. This type of case could be common under the CMA proposal because the DMU’s orders will go into immediate effect.

There is potentially much redeeming power in the Digital Regulation Co-operation Forum as Mr. Coscelli described it, but I take a different lesson from this admirable attempt to coordinate across agencies: Perhaps it is time to look beyond antitrust to solve problems that are not based upon market power. As the DRCF highlights, there are multiple agencies with overlapping authority in the digital market space. ICO and Ofcom each have authority to take action against a firm that disseminates fake news or false advertisements. Mr. Coscelli says it would be too cumbersome to take down individual bad actors, but, if so, then the solution is to adopt broader consumer protection rules, not apply an ill-fitting set of competition law rules. For example, the U.K. could change its notice-and-takedown rules to subject platforms to strict liability if they host fake news, even without knowledge that they are doing so, or perhaps only if they are negligent in discharging their obligation to police against it.

Alternatively, the government could shrink the amount of time platforms have to take down information; France gives platforms only about an hour to remove harmful information. That sort of solution does not raise the same prospect of broadly chilling market activity, but still addresses one of the concerns Mr. Coscelli raises with digital markets.

In sum, although Mr. Coscelli is of course correct that competition authorities and governments worldwide are considering whether to adopt broad reforms to their competition laws, the case against broadening remains strong. Instead of relying upon the self-corrective potential of markets, which is admittedly sometimes slower than anyone would like, the CMA assumes markets need regulation until firms prove otherwise. Although clearly well-intentioned, the DMU proposal is in too many respects not met to the task of protecting competition in digital markets; at worst, it will inhibit innovation in digital markets to the point of driving startups and other innovators out of the U.K.


[1] See Digital markets Taskforce, A new pro-competition regime for digital markets, at 22, Dec. 2020, available at: https://assets.publishing.service.gov.uk/media/5fce7567e90e07562f98286c/Digital_Taskforce_-_Advice.pdf; Oliver Dowden & Kwasi Kwarteng, A New Pro-competition Regime for Digital Markets, July 2021, available from: https://www.gov.uk/government/consultations/a-new-pro-competition-regime-for-digital-markets, at ¶ 27.

[2] Sam Bowman, Sam Dumitriu & Aria Babu, Conflicting Missions:The Risks of the Digital Markets Unit to Competition and Innovation, Int’l Center for L. & Econ., June 2021, at 13.

The U.S. economy survived the COVID-19 pandemic and associated government-imposed business shutdowns with a variety of innovations that facilitated online shopping, contactless payments, and reduced use and handling of cash, a known vector of disease transmission.

While many of these innovations were new, they would have been impossible but for their reliance on an established and ubiquitous technological infrastructure: the global credit and debit-card payments system. Not only did consumers prefer to use plastic instead of cash, the number of merchants going completely “cashless” quadrupled in the first two months of the pandemic alone. From food delivery to online shopping, many small businesses were able to survive largely because of payment cards.

But there are costs to maintain the global payment-card network that processes billions of transactions daily, and those costs are higher for online payments, which present elevated fraud and security risks. As a result, while the boom in online shopping over this past year kept many retailers and service providers afloat, that hasn’t prevented them from grousing about their increased card-processing costs.

So it is that retailers are now lobbying Washington to impose new regulations on payment-card markets designed to force down the fees they pay for accepting debit and credit cards. Called interchange fees, these fees are charged by banks that issue debit cards on each transaction, and they are part of a complex process that connects banks, card networks, merchants, and consumers.

Fig. 1: A basic illustration of the 3- and 4-party payment-processing networks that underlie the use of credit cards.

Regulation II—a provision of 2010’s Dodd–Frank Wall Street Reform and Consumer Protection Act commonly known as the “Durbin amendment,” after its primary sponsor, Senate Majority Whip Richard Durbin (D-Ill.)—placed price controls on interchange fees for debit cards issued by larger banks and credit unions (those with more than $10 billion in assets). It required all debit-card issuers to offer multiple networks for “routing” and processing card transactions. Merchants now want to expand these routing provisions to credit cards, as well. The consequences for consumers, especially low-income consumers, would be disastrous.

The price controls imposed by the Durbin amendment have led to a 52% decrease in the average per-transaction interchange fee, resulting in billions of dollars in revenue losses for covered depositories. But banks and credit unions have passed on these losses to consumers in the form of fewer free checking accounts, higher fees, and higher monthly minimums required to avoid those fees.

One empirical study found that the share of covered banks offering free checking accounts fell from 60% to 20%, the average monthly checking accounts fees increased from $4.34 to $7.44, and the minimum account balance required to avoid those fees increased by roughly 25%. Another study found that fees charged by covered institutions were 15% higher than they would have been absent the price regulation; those increases offset about 90% of the depositories’ lost revenue. Banks and credit unions also largely eliminated cash-back and other rewards on debit cards.

In fact, those who have been most harmed by the Durbin amendment’s consequences have been low-income consumers. Middle-class families hardly noticed the higher minimum balance requirements, or used their credit cards more often to offset the disappearance of debit-card rewards. Those with the smallest checking account balances, however, suffered the most from reduced availability of free banking and higher monthly maintenance and other fees. Priced out of the banking system, as many as 1 million people might have lost bank accounts in the wake of the Durbin amendment, forcing them to turn to such alternatives as prepaid cards, payday lenders, and pawn shops to make ends meet. Lacking bank accounts, these needy families weren’t even able to easily access their much-needed government stimulus funds at the onset of the pandemic without paying fees to alternative financial services providers.

In exchange for higher bank fees and reduced benefits, merchants promised lower prices at the pump and register. This has not been the case. Scholarship since  implementation of the Federal Reserve’s rule shows that whatever benefits have been gained have gone to merchants, with little pass-through to consumers. For instance, one study found that covered banks had their interchange revenue drop by 25%, but little evidence of a corresponding drop in prices from merchants.

Another study found that the benefits and costs to merchants have been unevenly distributed, with retailers who sell large-ticket items receiving a windfall, while those specializing in small-ticket items have often faced higher effective rates. Discounts previously offered to smaller merchants have been eliminated to offset reduced revenues from big-box stores. According to a 2014 Federal Reserve study, when acceptance fees increased, merchants hiked retail prices; but when fees were reduced, merchants pocketed the windfall.

Moreover, while the Durbin amendment’s proponents claimed it would only apply to big banks, the provisions that determine how transactions are routed on the payment networks apply to cards issued by credit unions and community banks, as well. As a result, smaller players have also seen average interchange fees beaten down, reducing this revenue stream even as they have been forced to cope with higher regulatory costs imposed by Dodd-Frank. Extending the Durbin amendment’s routing provisions to credit cards would further drive down interchange-fee revenue, creating the same negative spiral of higher consumer fees and reduced benefits that the original Durbin amendment spawned for debit cards.

More fundamentally, merchants believe it is their decision—not yours—as to which network will route your transaction. You may prefer Visa or Mastercard because of your confidence in their investments in security and anti-fraud detection, but later discover that the merchant has routed your transaction through a processor you’ve never heard of, simply because that network is cheaper for the merchant.

The resilience of the U.S. economy during this horrible viral contagion is due, in part, to the ubiquitous access of American families to credit and debit cards. That system has proved its mettle this past year, seamlessly adapting to the sudden shift to electronic payments. Yet, in the wake of this American success story, politicians and regulators, egged on by powerful special interests, instead want to meddle with this system just so big-box retailers can transfer their costs onto American families and small banks. As the economy and public health recovers, Congress and regulators should resist the impulse to impose new financial harm on working-class families.

The Biden Administration’s July 9 Executive Order on Promoting Competition in the American Economy is very much a mixed bag—some positive aspects, but many negative ones.

It will have some positive effects on economic welfare, to the extent it succeeds in lifting artificial barriers to competition that harm consumers and workers—such as allowing direct sales of hearing aids in drug stores—and helping to eliminate unnecessary occupational licensing restrictions, to name just two of several examples.

But it will likely have substantial negative effects on economic welfare as well. Many aspects of the order appear to emphasize new regulation—such as Net Neutrality requirements that may reduce investment in broadband by internet service providers—and imposing new regulatory requirements on airlines, pharmaceutical companies, digital platforms, banks, railways, shipping, and meat packers, among others. Arbitrarily imposing new rules in these areas, without a cost-beneficial appraisal and a showing of a market failure, threatens to reduce innovation and slow economic growth, hurting producers and consumer. (A careful review of specific regulatory proposals may shed greater light on the justifications for particular regulations.)

Antitrust-related proposals to challenge previously cleared mergers, and to impose new antitrust rulemaking, are likely to raise costly business uncertainty, to the detriment of businesses and consumers. They are a recipe for slower economic growth, not for vibrant competition.

An underlying problem with the order is that it is based on the false premise that competition has diminished significantly in recent decades and that “big is bad.” Economic analysis found in the February 2020 Economic Report of the President, and in other economic studies, debunks this flawed assumption.

In short, the order commits the fundamental mistake of proposing intrusive regulatory solutions for a largely nonexistent problem. Competitive issues are best handled through traditional well-accepted antitrust analysis, which centers on promoting consumer welfare and on weighing procompetitive efficiencies against anticompetitive harm on a case-by-case basis. This approach:

  1. Deals effectively with serious competitive problems; while at the same time
  2. Cabining error costs by taking into account all economically relevant considerations on a case-specific basis.

Rather than using an executive order to direct very specific regulatory approaches without a strong economic and factual basis, the Biden administration would have been better served by raising a host of competitive issues that merit possible study and investigation by expert agencies. Such an approach would have avoided imposing the costs of unwarranted regulation that unfortunately are likely to stem from the new order.

Finally, the order’s call for new regulations and the elimination of various existing legal policies will spawn matter-specific legal challenges, and may, in many cases, not succeed in court. This will impose unnecessary business uncertainty in addition to public and private resources wasted on litigation.

PHOTO: C-Span

Lina Khan’s appointment as chair of the Federal Trade Commission (FTC) is a remarkable accomplishment. At 32 years old, she is the youngest chair ever. Her longstanding criticisms of the Consumer Welfare Standard and alignment with the neo-Brandeisean school of thought make her appointment a significant achievement for proponents of those viewpoints. 

Her appointment also comes as House Democrats are preparing to mark up five bills designed to regulate Big Tech and, in the process, vastly expand the FTC’s powers. This expansion may combine with Khan’s appointment in ways that lawmakers considering the bills have not yet considered.

This is a critical time for the FTC. It has lost a number of high-profile lawsuits and is preparing to expand its rulemaking powers to regulate things like employment contracts and businesses’ use of data. Khan has also argued in favor of additional rulemaking powers around “unfair methods of competition.”

As things stand, the FTC under Khan’s leadership is likely to push for more extensive regulatory powers, akin to those held by the Federal Communications Commission (FCC). But these expansions would be trivial compared to what is proposed by many of the bills currently being prepared for a June 23 mark-up in the House Judiciary Committee. 

The flagship bill—Rep. David Cicilline’s (D-R.I.) American Innovation and Choice Online Act—is described as a platform “non-discrimination” bill. I have already discussed what the real-world effects of this bill would likely be. Briefly, it would restrict platforms’ ability to offer richer, more integrated services at all, since those integrations could be challenged as “discrimination” at the cost of would-be competitors’ offerings. Things like free shipping on Amazon Prime, pre-installed apps on iPhones, or even including links to Gmail and Google Calendar at the top of a Google Search page could be precluded under the bill’s terms; in each case, there is a potential competitor being undermined. 

In fact, the bill’s scope is so broad that some have argued that the FTC simply would not challenge “innocuous self-preferencing” like, say, Apple pre-installing Apple Music on iPhones. Economist Hal Singer has defended the proposals on the grounds that, “Due to limited resources, not all platform integration will be challenged.” 

But this shifts the focus to the FTC itself, and implies that it would have potentially enormous discretionary power under these proposals to enforce the law selectively. 

Companies found guilty of breaching the bill’s terms would be liable for civil penalties of up to 15 percent of annual U.S. revenue, a potentially significant sum. And though the Supreme Court recently ruled unanimously against the FTC’s powers to levy civil fines unilaterally—which the FTC opposed vociferously, and may get restored by other means—there are two scenarios through which it could end up getting extraordinarily extensive control over the platforms covered by the bill.

The first course is through selective enforcement. What Singer above describes as a positive—the fact that enforcers would just let “benign” violations of the law be—would mean that the FTC itself would have tremendous scope to choose which cases it brings, and might do so for idiosyncratic, politicized reasons.

This approach is common in countries with weak rule of law. Anti-corruption laws are frequently used to punish opponents of the regime in China, who probably are also corrupt, but are prosecuted because they have challenged the regime in some way. Hong Kong’s National Security law has also been used to target peaceful protestors and critical media thanks to its vague and overly broad drafting. 

Obviously, that’s far more sinister than what we’re talking about here. But these examples highlight how excessively broad laws applied at the enforcer’s discretion give broad powers to the enforcer to penalize defendants for other, unrelated things. Or, to quote Jay-Z: “Am I under arrest or should I guess some more? / ‘Well, you was doing 55 in a 54.’

The second path would be to use these powers as leverage to get broad consent decrees to govern the conduct of covered platforms. These occur when a lawsuit is settled, with the defendant company agreeing to change its business practices under supervision of the plaintiff agency (in this case, the FTC). The Cambridge Analytica lawsuit ended this way, with Facebook agreeing to change its data-sharing practices under the supervision of the FTC. 

This path would mean the FTC creating bespoke, open-ended regulation for each covered platform. Like the first path, this could create significant scope for discretionary decision-making by the FTC and potentially allow FTC officials to impose their own, non-economic goals on these firms. And it would require costly monitoring of each firm subject to bespoke regulation to ensure that no breaches of that regulation occurred.

Khan, as a critic of the Consumer Welfare Standard, believes that antitrust ought to be used to pursue non-economic objectives, including “the dispersion of political and economic control.” She, and the FTC under her, may wish to use this discretionary power to prosecute firms that she feels are hurting society for unrelated reasons, such as because of political stances they have (or have not) taken.

Khan’s fellow commissioner, Rebecca Kelly Slaughter, has argued that antitrust should be “antiracist”; that “as long as Black-owned businesses and Black consumers are systematically underrepresented and disadvantaged, we know our markets are not fair”; and that the FTC should consider using its existing rulemaking powers to address racist practices. These may be desirable goals, but their application would require contentious value judgements that lawmakers may not want the FTC to make.

Khan herself has been less explicit about the goals she has in mind, but has given some hints. In her essay “The Ideological Roots of America’s Market Power Problem”, Khan highlights approvingly former Associate Justice William O. Douglas’s account of:

“economic power as inextricably political. Power in industry is the power to steer outcomes. It grants outsized control to a few, subjecting the public to unaccountable private power—and thereby threatening democratic order. The account also offers a positive vision of how economic power should be organized (decentralized and dispersed), a recognition that forms of economic power are not inevitable and instead can be restructured.” [italics added]

Though I have focused on Cicilline’s flagship bill, others grant significant new powers to the FTC, as well. The data portability and interoperability bill doesn’t actually define what “data” is; it leaves it to the FTC to “define the term ‘data’ for the purpose of implementing and enforcing this Act.” And, as I’ve written elsewhere, data interoperability needs significant ongoing regulatory oversight to work at all, a responsibility that this bill also hands to the FTC. Even a move as apparently narrow as data portability will involve a significant expansion of the FTC’s powers and give it a greater role as an ongoing economic regulator.

It is concerning enough that this legislative package would prohibit conduct that is good for consumers, and that actually increases the competition faced by Big Tech firms. Congress should understand that it also gives extensive discretionary powers to an agency intent on using them to pursue broad, political goals. If Khan’s appointment as chair was a surprise, what her FTC does with the new powers given to her by Congress should not be.

Democratic leadership of the House Judiciary Committee have leaked the approach they plan to take to revise U.S. antitrust law and enforcement, with a particular focus on digital platforms. 

Broadly speaking, the bills would: raise fees for larger mergers and increase appropriations to the FTC and DOJ; require data portability and interoperability; declare that large platforms can’t own businesses that compete with other businesses that use the platform; effectively ban large platforms from making any acquisitions; and generally declare that large platforms cannot preference their own products or services. 

All of these are ideas that have been discussed before. They are very much in line with the EU’s approach to competition, which places more regulation-like burdens on big businesses, and which is introducing a Digital Markets Act that mirrors the Democrats’ proposals. Some Republicans are reportedly supportive of the proposals, which is surprising since they mean giving broad, discretionary powers to antitrust authorities that are controlled by Democrats who take an expansive view of antitrust enforcement as a way to achieve their other social and political goals. The proposals may also be unpopular with consumers if, for example, they would mean that popular features like integrating Maps into relevant Google Search results becomes prohibited.

The multi-bill approach here suggests that the committee is trying to throw as much at the wall as possible to see what sticks. It may reflect a lack of confidence among the proposers in their ability to get their proposals through wholesale, especially given that Amy Klobuchar’s CALERA bill in the Senate creates an alternative that, while still highly interventionist, does not create ex ante regulation of the Internet the same way these proposals do.

In general, the bills are misguided for three main reasons. 

One, they seek to make digital platforms into narrow conduits for other firms to operate on, ignoring the value created by platforms curating their own services by, for example, creating quality controls on entry (as Apple does on its App Store) or by integrating their services with related products (like, say, Google adding events from Gmail to users’ Google Calendars). 

Two, they ignore the procompetitive effects of digital platforms extending into each other’s markets and competing with each other there, in ways that often lead to far more intense competition—and better outcomes for consumers—than if the only firms that could compete with the incumbent platform were small startups.

Three, they ignore the importance of incentives for innovation. Platforms invest in new and better products when they can make money from doing so, and limiting their ability to do that means weakened incentives to innovate. Startups and their founders and investors are driven, in part, by the prospect of being acquired, often by the platforms themselves. Making those acquisitions more difficult, or even impossible, means removing one of the key ways startup founders can exit their firms, and hence one of the key rewards and incentives for starting an innovative new business. 

For more, our “Joint Submission of Antitrust Economists, Legal Scholars, and Practitioners” set out why many of the House Democrats’ assumptions about the state of the economy and antitrust enforcement were mistaken. And my post, “Buck’s “Third Way”: A Different Road to the Same Destination”, argued that House Republicans like Ken Buck were misguided in believing they could support some of the proposals and avoid the massive regulatory oversight that they said they rejected.

Platform Anti-Monopoly Act 

The flagship bill, introduced by Antitrust Subcommittee Chairman David Cicilline (D-R.I.), establishes a definition of “covered platform” used by several of the other bills. The measures would apply to platforms with at least 500,000 U.S.-based users, a market capitalization of more than $600 billion, and that is deemed a “critical trading partner” with the ability to restrict or impede the access that a “dependent business” has to its users or customers.

Cicilline’s bill would bar these covered platforms from being able to promote their own products and services over the products and services of competitors who use the platform. It also defines a number of other practices that would be regarded as discriminatory, including: 

  • Restricting or impeding “dependent businesses” from being able to access the platform or its software on the same terms as the platform’s own lines of business;
  • Conditioning access or status on purchasing other products or services from the platform; 
  • Using user data to support the platform’s own products in ways not extended to competitors; 
  • Restricting the platform’s commercial users from using or accessing data generated on the platform from their own customers;
  • Restricting platform users from uninstalling software pre-installed on the platform;
  • Restricting platform users from providing links to facilitate business off of the platform;
  • Preferencing the platform’s own products or services in search results or rankings;
  • Interfering with how a dependent business prices its products; 
  • Impeding a dependent business’ users from connecting to services or products that compete with those offered by the platform; and
  • Retaliating against users who raise concerns with law enforcement about potential violations of the act.

On a basic level, these would prohibit lots of behavior that is benign and that can improve the quality of digital services for users. Apple pre-installing a Weather app on the iPhone would, for example, run afoul of these rules, and the rules as proposed could prohibit iPhones from coming with pre-installed apps at all. Instead, users would have to manually download each app themselves, if indeed Apple was allowed to include the App Store itself pre-installed on the iPhone, given that this competes with other would-be app stores.

Apart from the obvious reduction in the quality of services and convenience for users that this would involve, this kind of conduct (known as “self-preferencing”) is usually procompetitive. For example, self-preferencing allows platforms to compete with one another by using their strength in one market to enter a different one; Google’s Shopping results in the Search page increase the competition that Amazon faces, because it presents consumers with a convenient alternative when they’re shopping online for products. Similarly, Amazon’s purchase of the video-game streaming service Twitch, and the self-preferencing it does to encourage Amazon customers to use Twitch and support content creators on that platform, strengthens the competition that rivals like YouTube face. 

It also helps innovation, because it gives firms a reason to invest in services that would otherwise be unprofitable for them. Google invests in Android, and gives much of it away for free, because it can bundle Google Search into the OS, and make money from that. If Google could not self-preference Google Search on Android, the open source business model simply wouldn’t work—it wouldn’t be able to make money from Android, and would have to charge for it in other ways that may be less profitable and hence give it less reason to invest in the operating system. 

This behavior can also increase innovation by the competitors of these companies, both by prompting them to improve their products (as, for example, Google Android did with Microsoft’s mobile operating system offerings) and by growing the size of the customer base for products of this kind. For example, video games published by console manufacturers (like Nintendo’s Zelda and Mario games) are often blockbusters that grow the overall size of the user base for the consoles, increasing demand for third-party titles as well.

For more, check out “Against the Vertical Discrimination Presumption” by Geoffrey Manne and Dirk Auer’s piece “On the Origin of Platforms: An Evolutionary Perspective”.

Ending Platform Monopolies Act 

Sponsored by Rep. Pramila Jayapal (D-Wash.), this bill would make it illegal for covered platforms to control lines of business that pose “irreconcilable conflicts of interest,” enforced through civil litigation powers granted to the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ).

Specifically, the bill targets lines of business that create “a substantial incentive” for the platform to advantage its own products or services over those of competitors that use the platform, or to exclude or disadvantage competing businesses from using the platform. The FTC and DOJ could potentially order that platforms divest lines of business that violate the act.

This targets similar conduct as the previous bill, but involves the forced separation of different lines of business. It also appears to go even further, seemingly implying that companies like Google could not even develop services like Google Maps or Chrome because their existence would create such “substantial incentives” to self-preference them over the products of their competitors. 

Apart from the straightforward loss of innovation and product developments this would involve, requiring every tech company to be narrowly focused on a single line of business would substantially entrench Big Tech incumbents, because it would make it impossible for them to extend into adjacent markets to compete with one another. For example, Apple could not develop a search engine to compete with Google under these rules, and Amazon would be forced to sell its video-streaming services that compete with Netflix and Youtube.

For more, check out Geoffrey Manne’s written testimony to the House Antitrust Subcommittee and “Platform Self-Preferencing Can Be Good for Consumers and Even Competitors” by Geoffrey and me. 

Platform Competition and Opportunity Act

Introduced by Rep. Hakeem Jeffries (D-N.Y.), this bill would bar covered platforms from making essentially any acquisitions at all. To be excluded from the ban on acquisitions, the platform would have to present “clear and convincing evidence” that the acquired business does not compete with the platform for any product or service, does not pose a potential competitive threat to the platform, and would not in any way enhance or help maintain the acquiring platform’s market position. 

The two main ways that founders and investors can make a return on a successful startup are to float the company at IPO or to be acquired by another business. The latter of these, acquisitions, is extremely important. Between 2008 and 2019, 90 percent of U.S. start-up exits happened through acquisition. In a recent survey, half of current startup executives said they aimed to be acquired. One study found that countries that made it easier for firms to be taken over saw a 40-50 percent increase in VC activity, and that U.S. states that made acquisitions harder saw a 27 percent decrease in VC investment deals

So this proposal would probably reduce investment in U.S. startups, since it makes it more difficult for them to be acquired. It would therefore reduce innovation as a result. It would also reduce inter-platform competition by banning deals that allow firms to move into new markets, like the acquisition of Beats that helped Apple to build a Spotify competitor, or the deals that helped Google, Microsoft, and Amazon build cloud-computing services that all compete with each other. It could also reduce competition faced by old industries, by preventing tech companies from buying firms that enable it to move into new markets—like Amazon’s acquisitions of health-care companies that it has used to build a health-care offering. Even Walmart’s acquisition of Jet.com, which it has used to build an Amazon competitor, could have been banned under this law if Walmart had had a higher market cap at the time.

For more, check out Dirk Auer’s piece “Facebook and the Pros and Cons of Ex Post Merger Reviews” and my piece “Cracking down on mergers would leave us all worse off”. 

ACCESS Act

The Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act, sponsored by Rep. Mary Gay Scanlon (D-Pa.), would establish data portability and interoperability requirements for platforms. 

Under terms of the legislation, covered platforms would be required to allow third parties to transfer data to their users or, with the user’s consent, to a competing business. It also would require platforms to facilitate compatible and interoperable communications with competing businesses. The law directs the FTC to establish technical committees to promulgate the standards for portability and interoperability. 

Data portability and interoperability involve trade-offs in terms of security and usability, and overseeing them can be extremely costly and difficult. In security terms, interoperability requirements prevent companies from using closed systems to protect users from hostile third parties. Mandatory openness means increasing—sometimes, substantially so—the risk of data breaches and leaks. In practice, that could mean users’ private messages or photos being leaked more frequently, or activity on a social media page that a user considers to be “their” private data, but that “belongs” to another user under the terms of use, can be exported and publicized as such. 

It can also make digital services more buggy and unreliable, by requiring that they are built in a more “open” way that may be more prone to unanticipated software mismatches. A good example is that of Windows vs iOS; Windows is far more interoperable with third-party software than iOS is, but tends to be less stable as a result, and users often prefer the closed, stable system. 

Interoperability requirements also entail ongoing regulatory oversight, to make sure data is being provided to third parties reliably. It’s difficult to build an app around another company’s data without assurance that the data will be available when users want it. For a requirement as broad as this bill’s, that could mean setting up quite a large new de facto regulator. 

In the UK, Open Banking (an interoperability requirement imposed on British retail banks) has suffered from significant service outages, and targets a level of uptime that many developers complain is too low for them to build products around. Nor has Open Banking yet led to any obvious competition benefits.

For more, check out Gus Hurwitz’s piece “Portable Social Media Aren’t Like Portable Phone Numbers” and my piece “Why Data Interoperability Is Harder Than It Looks: The Open Banking Experience”.

Merger Filing Fee Modernization Act

A bill that mirrors language in the Endless Frontier Act recently passed by the U.S. Senate, would significantly raise filing fees for the largest mergers. Rather than the current cap of $280,000 for mergers valued at more than $500 million, the bill—sponsored by Rep. Joe Neguse (D-Colo.)–the new schedule would assess fees of $2.25 million for mergers valued at more than $5 billion; $800,000 for those valued at between $2 billion and $5 billion; and $400,000 for those between $1 billion and $2 billion.

Smaller mergers would actually see their filing fees cut: from $280,000 to $250,000 for those between $500 million and $1 billion; from $125,000 to $100,000 for those between $161.5 million and $500 million; and from $45,000 to $30,000 for those less than $161.5 million. 

In addition, the bill would appropriate $418 million to the FTC and $252 million to the DOJ’s Antitrust Division for Fiscal Year 2022. Most people in the antitrust world are generally supportive of more funding for the FTC and DOJ, although whether this is actually good or not depends both on how it’s spent at those places. 

It’s hard to object if it goes towards deepening the agencies’ capacities and knowledge, by hiring and retaining higher quality staff with salaries that are more competitive with those offered by the private sector, and on greater efforts to study the effects of the antitrust laws and past cases on the economy. If it goes toward broadening the activities of the agencies, by doing more and enabling them to pursue a more aggressive enforcement agenda, and supporting whatever of the above proposals make it into law, then it could be very harmful. 

For more, check out my post “Buck’s “Third Way”: A Different Road to the Same Destination” and Thom Lambert’s post “Bad Blood at the FTC”.

Congressman Buck’s “Third Way” report offers a compromise between the House Judiciary Committee’s majority report, which proposes sweeping new regulation of tech companies, and the status quo, which Buck argues is unfair and insufficient. But though Buck rejects many of the majority’s reports proposals, what he proposes instead would lead to virtually the same outcome via a slightly longer process. 

The most significant majority proposals that Buck rejects are the structural separation to prevent a company that runs a platform from operating on that platform “in competition with the firms dependent on its infrastructure”, and line-of-business restrictions that would confine tech companies to a small number of markets, to prevent them from preferencing their other products to the detriment of competitors.

Buck rules these out, saying that they are “regulatory in nature [and] invite unforeseen consequences and divert attention away from public interest antitrust enforcement by our antitrust agencies.” He goes on to say that “this proposal is a thinly veiled call to break up Big Tech firms.”

Instead, Buck endorses, either fully or provisionally, measures including revitalising the essential facilities doctrine, imposing data interoperability mandates on platforms, and changing antitrust law to prevent “monopoly leveraging and predatory pricing”. 

Put together, though, these would amount to the same thing that the Democratic majority report proposes: a world where platforms are basically just conduits, regulated to be neutral and open, and where the companies that run them require a regulator’s go-ahead for important decisions — a process that would be just as influenced lobbying and political considerations, and insulated from market price signals, as any other regulator’s decisions are.

Revitalizing the essential facilities doctrine

Buck describes proposals to “revitalize the essential facilities doctrine” as “common ground” that warrant further consideration. This would mean that platforms deemed to be “essential facilities” would be required to offer access to their platform to third parties at a “reasonable” price, except in exceptional circumstances. The presumption would be that these platforms were anticompetitively foreclosing third party developers and merchants by either denying them access to their platforms or by charging them “too high” prices. 

This would require the kind of regulatory oversight that Buck says he wants to avoid. He says that “conservatives should be wary of handing additional regulatory authority to agencies in an attempt to micromanage platforms’ access rules.” But there’s no way to avoid this when the “facility” — and hence its pricing and access rules — changes as frequently as any digital platform does. In practice, digital platforms would have to justify their pricing rules and decisions about exclusion of third parties to courts or a regulator as often as they make those decisions.

If Apple’s App Store were deemed an essential facility such that it is presumed to be foreclosing third party developers any time it rejected their submissions, it would have to submit to regulatory scrutiny of the “reasonableness” of its commercial decisions on, literally, a daily basis.

That would likely require price controls to prevent platforms from using pricing to de facto exclude third parties they did not want to deal with. Adjudication of “fair” pricing by courts is unlikely to be a sustainable solution. Justice Breyer, in Town of Concord v. Boston Edison Co., considered this to be outside the courts’ purview:

[H]ow is a judge or jury to determine a ‘fair price?’ Is it the price charged by other suppliers of the primary product? None exist. Is it the price that competition ‘would have set’ were the primary level not monopolized? How can the court determine this price without examining costs and demands, indeed without acting like a rate-setting regulatory agency, the rate-setting proceedings of which often last for several years? Further, how is the court to decide the proper size of the price ‘gap?’ Must it be large enough for all independent competing firms to make a ‘living profit,’ no matter how inefficient they may be? . . . And how should the court respond when costs or demands change over time, as they inevitably will?

In practice, infrastructure treated as an essential facility is usually subject to pricing control by a regulator. This has its own difficulties. The UK’s energy and water infrastructure is an example. In determining optimal access pricing, regulators must determine the price that weighs competing needs to maximise short-term output, incentivise investment by the infrastructure owner, incentivise innovation and entry by competitors (e.g., local energy grids) and, of course, avoid “excessive” pricing. 

This is a near-impossible task, and the process is often drawn out and subject to challenges even in markets where the infrastructure is relatively simple. It is even less likely that these considerations would be objectively tractable in digital markets.

Treating a service as an essential facility is based on the premise that, absent mandated access, it is impossible to compete with it. But mandating access does not, on its own, prevent it from extracting monopoly rents from consumers; it just means that other companies selling inputs can have their share of the rents. 

So you may end up with two different sets of price controls: on the consumer side, to determine how much monopoly rent can be extracted from consumers, and on the access side, to determine how the monopoly rents are divided.

The UK’s energy market has both, for example. In the case of something like an electricity network, where it may simply not be physically or economically feasible to construct a second, competing network, this might be the least-bad course of action. In such circumstances, consumer-side price regulation might make sense. 

But if a service could, in fact, be competed with by others, treating it as an essential facility may be affirmatively harmful to competition and consumers if it diverts investment and time away from that potential competitor by allowing other companies to acquire some of the incumbent’s rents themselves.

The HJC report assumes that Apple is a monopolist, because, among people who own iPhones, the App Store is the only way to install third-party software. Treating the App Store as an essential facility may mean a ban on Apple charging “excessive prices” to companies like Spotify or Epic that would like to use it, or on Apple blocking them for offering users alternative in-app ways of buying their services.

If it were impossible for users to switch from iPhones, or for app developers to earn revenue through other mechanisms, this logic might be sound. But it would still not change the fact that the App Store platform was able to charge users monopoly prices; it would just mean that Epic and Spotify could capture some of those monopoly rents for themselves. Nice for them, but not for consumers. And since both companies have already grown to be pretty big and profitable with the constraints they object to in place, it seems difficult to argue that they cannot compete with these in place and sounds more like they’d just like a bigger share of the pie.

And, in fact, it is possible to switch away from the iPhone to Android. I have personally switched back and forth several times over the past few years, for example. And so have many others — despite what some claim, it’s really not that hard, especially now that most important data is stored on cloud-based services, and both companies offer an app to switch from the other. Apple also does not act like a monopolist — its Bionic chips are vastly better than any competitor’s and it continues to invest in and develop them.

So in practice, users switching from iPhone to Android if Epic’s games and Spotify’s music are not available constrains Apple, to some extent. If Apple did drive those services permanently off their platform, it would make Android relatively more attractive, and some users would move away — Apple would bear some of the costs of its ecosystem becoming worse. 

Assuming away this kind of competition, as Buck and the majority report do, is implausible. Not only that, but Buck and the majority believe that competition in this market is impossible — no policy or antitrust action could change things, and all that’s left is to regulate the market like it’s an electricity grid. 

And it means that platforms could often face situations where they could not expect to make themselves profitable after building their markets, since they could not control the supply side in order to earn revenues. That would make it harder to build platforms, and weaken competition, especially competition faced by incumbents.

Mandating interoperability

Interoperability mandates, which Buck supports, require platforms to make their products open and interoperable with third party software. If Twitter were required to be interoperable, for example, it would have to provide a mechanism (probably a set of open APIs) by which third party software could tweet and read its feeds, upload photos, send and receive DMs, and so on. 

Obviously, what interoperability actually involves differs from service to service, and involves decisions about design that are specific to each service. These variations are relevant because they mean interoperability requires discretionary regulation, including about product design, and can’t just be covered by a simple piece of legislation or a court order. 

To give an example: interoperability means a heightened security risk, perhaps from people unwittingly authorising a bad actor to access their private messages. How much is it appropriate to warn users about this, and how tight should your security controls be? It is probably excessive to require that users provide a sworn affidavit with witnesses, and even some written warnings about the risks may be so over the top as to scare off virtually any interested user. But some level of warning and user authentication is appropriate. So how much? 

Similarly, a company that has been required to offer its customers’ data through an API, but doesn’t really want to, can make life miserable for third party services that want to use it. Changing the API without warning, or letting its service drop or slow down, can break other services, and few users will be likely to want to use a third-party service that is unreliable. But some outages are inevitable, and some changes to the API and service are desirable. How do you decide how much?

These are not abstract examples. Open Banking in the UK, which requires interoperability of personal and small business current accounts, is the most developed example of interoperability in the world. It has been cited by former Chair of the Council of Economic Advisors, Jason Furman, among others, as a model for interoperability in tech. It has faced all of these questions: one bank, for instance, required that customers pass through twelve warning screens to approve a third party app to access their banking details.

To address problems like this, Open Banking has needed an “implementation entity” to design many of its most important elements. This is a de facto regulator, and it has taken years of difficult design decisions to arrive at Open Banking’s current form. 

Having helped write the UK’s industry review into Open Banking, I am cautiously optimistic about what it might be able to do for banking in Britain, not least because that market is already heavily regulated and lacking in competition. But it has been a huge undertaking, and has related to a relatively narrow set of data (its core is just two different things — the ability to read an account’s balance and transaction history, and the ability to initiate payments) in a sector that is not known for rapidly changing technology. Here, the costs of regulation may be outweighed by the benefits.

I am deeply sceptical that the same would be the case in most digital markets, where products do change rapidly, where new entrants frequently attempt to enter the market (and often succeed), where the security trade-offs are even more difficult to adjudicate, and where the economics are less straightforward, given that many services are provided at least in part because of the access to customer data they provide. 

Even if I am wrong, it is unavoidable that interoperability in digital markets would require an equivalent body to make and implement decisions when trade-offs are involved. This, again, would require a regulator like the UK’s implementation entity, and one that was enormous, given the number and diversity of services that it would have to oversee. And it would likely have to make important and difficult design decisions to which there is no clear answer. 

Banning self-preferencing

Buck’s Third Way would also ban digital platforms from self-preferencing. This typically involves an incumbent that can provide a good more cheaply than its third-party competitors — whether it’s through use of data that those third parties do not have access to, reputational advantages that mean customers will be more likely to use their products, or through scale efficiencies that allow it to provide goods to a larger customer base for a cheaper price. 

Although many people criticise self-preferencing as being unfair on competitors, “self-preferencing” is an inherent part of almost every business. When a company employs its own in-house accountants, cleaners or lawyers, instead of contracting out for them, it is engaged in internal self-preferencing. Any firm that is vertically integrated to any extent, instead of contracting externally for every single ancillary service other than the one it sells in the market, is self-preferencing. Coase’s theory of the firm is all about why this kind of behaviour happens, instead of every worker contracting on the open market for everything they do. His answer is that transaction costs make it cheaper to bring certain business relationships in-house than to contract externally for them. Virtually everyone agrees that this is desirable to some extent.

Nor does it somehow become a problem when the self-preferencing takes place on the consumer product side. Any firm that offers any bundle of products — like a smartphone that can run only the manufacturer’s operating system — is engaged in self-preferencing, because users cannot construct their own bundle with that company’s hardware and another’s operating system. But the efficiency benefits often outweigh the lack of choice.

Self-preferencing in digital platforms occurs, for example, when Google includes relevant Shopping or Maps results at the top of its general Search results, or when Amazon gives its own store-brand products (like the AmazonBasics range) a prominent place in the results listing.

There are good reasons to think that both of these are good for competition and consumer welfare. Google making Shopping results easily visible makes it a stronger competitor to Amazon, and including Maps results when you search for a restaurant just makes it more convenient to get the information you’re looking for.

Amazon sells its own private label products partially because doing so is profitable (even when undercutting rivals), partially to fill holes in product lines (like clothing, where 11% of listings were Amazon private label as of November 2018), and partially because it increases users’ likelihood to use Amazon if they expect to find a reliable product from a brand they trust. According to Amazon, they account for less than 1% of its annual retail sales, in contrast to the 19% of revenues ($54 billion) Amazon makes from third party seller services, which includes Marketplace commissions. Any analysis that ignores that Amazon has to balance those sources of revenue, and so has to tread carefully, is deficient. 

With “commodity” products (like, say, batteries and USB cables), where multiple sellers are offering very similar or identical versions of the same thing, private label competition works well for both Amazon and consumers. By Amazon’s own rules it can enter this market using aggregated data, but this doesn’t give it a significant advantage, because that data is easily obtainable from multiple sources, including Amazon itself, which makes detailed aggregated sales data freely available to third-party retailers

Amazon does profit from sales of these products, of course. And other merchants suffer by having to cut their prices to compete. That’s precisely what competition involves — competition is incompatible with a quiet life for businesses. But consumers benefit, and the biggest benefit to Amazon is that it assures its potential customers that when they visit they will be able to find a product that is cheap and reliable, so they keep coming back.

It is even hard to argue that in aggregate this practice is damaging to third-party sellers: many, like Anker, have built successful businesses on Amazon despite private-label competition precisely because the value of the platform increases for all parties as user trust and confidence in it does.

In these cases and in others, platforms act to solve market failures on the markets they host, as Andrei Hagiu has argued. To maximize profits, digital platforms need to strike a balance between being an attractive place for third-party merchants to sell their goods and being attractive to consumers by offering low prices. The latter will frequently clash with the former — and that’s the difficulty of managing a platform. 

To mistake this pro-competitive behaviour with an absence of competition is misguided. But that is a key conclusion of Buck’s Third Way: that the damage to competitors makes this behaviour harmful overall, and that it should be curtailed with “non-discrimination” rules. 

Treating below-cost selling as “predatory pricing”

Buck’s report equates below-cost selling with predatory pricing (“predatory pricing, also known as below-cost selling”). This is mistaken. Predatory pricing refers to a particular scenario where your price cut is temporary and designed to drive a competitor out of business, so that you can raise prices later and recoup your losses. 

It is easy to see that this does not describe the vast majority of below-cost selling. Buck’s formulation would describe all of the following as “predatory pricing”:

  • A restaurants that gives away ketchup for free;
  • An online retailer that offers free shipping and returns;
  • A grocery store that sells tins of beans for 3p a can. (This really happened when I was a child.)

The rationale for offering below-cost prices differs in each of these cases. Sometimes it’s a marketing ploy — Tesco sells those beans to get some free media, and to entice people into their stores, hoping they’ll decide to do the rest of their weekly shop there at the same time. Sometimes it’s about reducing frictions — the marginal cost of ketchup is so low that it’s simpler to just give it away. Sometimes it’s about reducing the fixed costs of transactions so more take place — allowing customers who buy your products to return them easily may mean more are willing to buy them overall, because there’s less risk for them if they don’t like what they buy. 

Obviously, none of these is “predatory”: none is done in the expectation that the below-cost selling will drive those businesses’ competitors out of business, allowing them to make monopoly profits later.

True predatory pricing is theoretically possible, but very difficult. As David Henderson describes, to successfully engage in predatory pricing means taking enormous and rising losses that grow for the “predatory” firm as customers switch to it from its competitor. And once the rival firm has exited the market, if the predatory firm raises prices above average cost (i.e., to recoup its losses), there is no guarantee that a new competitor will not enter the market selling at the previously competitive price. And the competing firm can either shut down temporarily or, in some cases, just buy up the “predatory” firm’s discounted goods to resell later. It is debatable whether the canonical predatory pricing case, Standard Oil, is itself even an example of that behaviour.

Offering a product below cost in a multi-sided market (like a digital platform) can be a way of building a customer base in order to incentivise entry on the other side of the market. When network effects exist, so additional users make the service more valuable to existing users, it can be worthwhile to subsidise the initial users until the service reaches a certain size. 

Uber subsidising drivers and riders in a new city is an example of this — riders want enough drivers on the road that they know they’ll be picked up fairly quickly if they order one, and drivers want enough riders that they know they’ll be able to earn a decent night’s fares if they use the app. This requires a certain volume of users on both sides — to get there, it can be in everyone’s interest for the platform to subsidise one or both sides of the market to reach that critical mass.

The slightly longer road to regulation

That is another reason for below-cost pricing: someone other than the user may be part-paying for a product, to build a market they hope to profit from later. Platforms must adjust pricing and their offerings to each side of their market to manage supply and demand. Epic, for example, is trying to build a desktop computer game store to rival the largest incumbent, Steam. To win over customers, it has been giving away games for free to users, who can own them on that store forever. 

That is clearly pro-competitive — Epic is hoping to get users over the habit of using Steam for all their games, in the hope that they will recoup the costs of doing so later in increased sales. And it is good for consumers to get free stuff. This kind of behaviour is very common. As well as Uber and Epic, smaller platforms do it too. 

Buck’s proposals would make this kind of behaviour much more difficult, and permitted only if a regulator or court allows it, instead of if the market can bear it. On both sides of the coin, Buck’s proposals would prevent platforms from the behaviour that allows them to grow in the first place — enticing suppliers and consumers and subsidising either side until critical mass has been reached that allows the platform to exist by itself, and the platform owner to recoup its investments. Fundamentally, both Buck and the majority take the existence of platforms as a given, ignoring the incentives to create new ones and compete with incumbents. 

In doing so, they give up on competition altogether. As described, Buck’s provisions would necessitate ongoing rule-making, including price controls, to work. It is unlikely that a court could do this, since the relevant costs would change too often for one-shot rule-making of the kind a court could do. To be effective at all, Buck’s proposals would require an extensive, active regulator, just as the majority report’s would. 

Buck nominally argues against this sort of outcome — “Conservatives should be wary of handing additional regulatory authority to agencies in an attempt to micromanage platforms’ access rules” — but it is probably unavoidable, given the changes he proposes. And because the rule changes he proposes would apply to the whole economy, not just tech, his proposals may, perversely, end up being even more extensive and interventionist than the majority’s.

Other than this, the differences in practice between Buck’s proposals and the Democrats’ proposals would be trivial. At best, Buck’s Third Way is just a longer route to the same destination.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

The Wall Street Journal reports congressional leaders have agreed to impose limits on stock buybacks and dividend payments for companies receiving aid under the COVID-19 disaster relief package. 

Rather than a flat-out ban, the draft legislation forbids any company taking federal emergency loans or loan guarantees from repurchasing its own stock or paying shareholder dividends. The ban lasts for the term of the loans, plus one year after the aid had ended.

In theory, under a strict set of conditions, there is no difference between dividends and buybacks. Both approaches distribute cash from the corporation to shareholders. In practice, there are big differences between dividends and share repurchases.

  • Dividends are publicly visible actions and require authorization by the board of directors. Shareholders have expectations of regular, stable dividends. Buybacks generally lack such transparency. Firms have flexibility in choosing the timing and the amount of repurchases, subject to the details of their repurchase programs.
  • Cash dividends have no effect on the number of shares outstanding. In contrast, share repurchases reduce the number of shares outstanding. By reducing the number of shares outstanding, buybacks increase earnings per share, all other things being equal. 

Over the past 15 years, buybacks have outpaced dividend payouts. The figure above, from Seeking Alpha, shows that while dividends have grown relatively smoothly over time, the aggregate value of buybacks are volatile and vary with the business cycle. In general, firms increase their repurchases relative to dividends when the economy booms and reduce them when the economy slows or shrinks. 

This observation is consistent with a theory that buybacks are associated with periods of greater-than-expected financial performance. On the other hand, dividends are associated with expectations of long-term profitability. Dividends can decrease, but only when profits are expected to be “permanently” lower. 

During the Great Recession, the figure above shows that dividends declined by about 10%, the amount of share repurchases plummeted by approximately 85%. The flexibility afforded by buybacks provided stability in dividends.

There is some logic to dividend and buyback limits imposed by the COVID-19 disaster relief package. If a firm has enough cash on hand to pay dividends or repurchase shares, then it doesn’t need cash assistance from the federal government. Similarly, if a firm is so desperate for cash that it needs a federal loan or loan guarantee, then it doesn’t have enough cash to provide a payout to shareholders. Surely managers understand this and sophisticated shareholders should too.

Because of this understanding, the dividend and buyback limits may be a non-binding constraint. It’s not a “good look” for a corporation to accept millions of dollars in federal aid, only to turn around and hand out those taxpayer dollars to the company’s shareholders. That’s a sure way to get an unflattering profile in the New York Times and an invitation to attend an uncomfortable hearing at the U.S. Capitol. Even if a distressed firm could repurchase its shares, it’s unlikely that it would.

The logic behind the plus-one-year ban on dividends and buybacks is less clear. The relief package is meant to get the U.S. economy back to normal as fast as possible. That means if a firm repays its financial assistance early, the company’s shareholders should be rewarded with a cash payout rather than waiting a year for some arbitrary clock to run out.

The ban on dividends and buybacks may lead to an unintended consequence of increased merger and acquisition activity. Vox reports an email to Goldman Sachs’ investment banking division says Goldman expects to see an increase in hostile takeovers and shareholder activism as the prices of public companies fall. Cash rich firms who are subject to the ban and cannot get that cash to their existing shareholders may be especially susceptible takeover targets.

Desperate times call for desperate measures and these are desperate times. Buyback backlash has been brewing for sometime and the COVID-19 relief package presents a perfect opportunity to ban buybacks. With the pressures businesses are under right now, it’s unlikely there’ll be many buybacks over the next few months. The concern should be over the unintended consequences facing firms once the economy recovers.

[TOTM: The following is the sixth in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Kristian Stout, Associate Director at the International Center for Law & Economics.

There is a push underway to punish big tech firms, both for alleged wrongdoing and in an effort to prevent future harm. But the movement to use antitrust law to punish big tech firms is far more about political expediency than it is about sound competition policy. 

For a variety of reasons, there is a current of dissatisfaction in society with respect to the big tech companies, some of it earned, and some of it unearned. Between March 2019 and September 2019, polls suggested that Americans were increasingly willing to entertain breaking up or otherwise increasing regulation on the big tech firms. No doubt, some significant share of this movement in popular opinion is inspired by increasingly negative reporting from major news outlets (see, for a small example, 1, 2, 3, 4, 5, 6, 7, 8). But, the fact that these companies make missteps does not require that any means at hand should be used to punish them. 

Further, not only is every tool not equal in dealing with the harms these companies could cause, we must be mindful that, even when some harm occurs, these companies generate a huge amount of social welfare. Our policy approaches to dealing with misconduct, therefore, must be appropriately measured. 

To listen to  the media, politicians, and activists, however, one wouldn’t know that anything except extreme action — often using antitrust law — is required. Presidential hopefuls want to smash the big tech companies, while activists and academics see evidence of anticompetitive conduct in every facet of these  companies’ behavior. Indeed, some claim that the firms themselves are per se a harm to democracy

The confluence of consumer dissatisfaction and activist zeal leads to a toxic result: not wanting to let a good crisis go to waste, activists and politicians push the envelope on the antitrust theories they want to apply to the detriment of the rule of law. 

Consumer concerns

Missteps by the big tech companies, both perceived and real, have led to some degree of consumer dissatisfaction. In terms of real harms data breaches and privacy scandals have gained more attention in recent years and are undoubtedly valid concerns of consumers. 

In terms of perceived harms, it has, for example, become increasingly popular to blame big tech companies for tilting the communications landscape in favor of one or another political preference. Ironically, the accusations leveled against big tech are frequently at odds. Some progressives blame big tech for helping Donald Trump to be elected president, while some conservatives believe a pervasive bias in Silicon Valley in favor of progressive policies harms conservative voices. 

But, at the same time, consumers are well familiar with the benefits that search engines, the smartphone revolution, and e-commerce have provided to society. The daily life of the average consumer is considerably better today than it was in past decades thanks to the digital services and low cost technology that is in reach of even the poorest among us. 

So why do consumers appear to be listening to the heated rhetoric of the antitrust populists?

Paul Seabright pointed to one of the big things that I think is motivating consumer willingness to listen to populist attacks on otherwise well-regarded digital services. In his keynote speech at ICLE’s “Dynamic Competition and Online Platforms” conference earlier this month, he discussed the role of trust in the platform ecosystem. According to Seabright, 

Large digital firms create anxiety in proportion to how much they meet our needs… They are strong complements to many of our talents and activities – but they also threaten to provide lots of easy substitutes for us and our talents and activities… The more we trust them the more we (rightly) fear the abuse of their trust.

Extending this insight, we imbue these platforms with a great deal of trust because they are so important to our daily lives. And we have a tendency to respond dramatically to (perceived or actual) violations of trust by these platforms because they do such a great job in nearly every respect. When a breach of that trust happens — even if its relative impact on our lives is small, and the platform continues to provide a large amount of value — we respond not in terms of its proportionate effect on our lives, but in the emotional terms of one who has been wronged by a confidant.

It is that emotional lever that populist activists and politicians are able to press. The populists can frame the failure of the firms as the sum total of their existence, and push for extreme measures that otherwise (and even a few short years ago) would have been unimaginable. 

Political opportunism

The populist crusade is fueled by the underlying sentiment of consumers, but has its own separate ends. Some critics of the state of antitrust law are seeking merely a realignment of priorities within existing doctrine. The pernicious crusade of antitrust populists, however, seeks much more. These activists (and some presidential hopefuls) want nothing short of breaking up big tech and of returning the country to some ideal of “democracy” imagined as having existed in the hazy past when antitrust laws were unevenly enforced.

It is a laudable goal to ensure that the antitrust laws are being properly administered on their own terms, but it is an entirely different project to crusade to make antitrust great again based on the flawed understandings from a century ago. 

In few areas of life would most of us actually yearn to reestablish the political and social order of times gone by — notwithstanding presidential rhetoric. The sepia-toned crusade to smash tech companies into pieces inherits its fervor from Louis Brandeis and his fellow travelers who took on the mustache-twisting villains of their time: Carnegie, Morgan, Mellon and the rest of the allegedly dirty crew of scoundrels. 

Matt Stoller’s recent book Goliath captures this populist dynamic well. He describes the history of antitrust passionately, as a morality play between the forces of light and those of darkness. On one side are heroes like Wright Patman, a scrappy poor kid from Texas who went to a no-name law school and rose to prominence in Washington as an anti-big-business crusader. On the other side are shadowy characters like Andrew Mellon, who cynically manipulated his way into government after growing bored with administering his vast, immorally acquired economic empire. 

A hundred years ago the populist antitrust quest was a response to the success of industrial titans, and their concentration of wealth in the hands of relatively few. Today, a similar set of arguments are directed at the so-called big tech companies. Stoller sees the presence of large tech firms as inimical to democracy itself — “If we don’t do something about big tech, something meaningful, we’ll just become a fascist society. It’s fairly simple.” Tim Wu has made similar claims (which my colleague Alec Stapp has ably rebutted).

In the imagination of the populists, there are good guys and bad guys and the optimal economy would approach atomistic competition. In such a world, the “little guy” can have his due and nefarious large corporations cannot become too economically powerful relative to the state.

Politicians enter this mix of consumer sentiment and populist activism with their own unique priors. On the one hand, consumer dissatisfaction makes big tech a ripe target to score easy political points. It’s a hot topic that fits easily into fundraising pitches. After all, who really cares if the billionaires lose a couple of million dollars through state intervention?

In truth, I suspect that politicians are ambivalent about what exactly to do to make good on their anti-big tech rhetoric. They will be forced to admit that these companies provide an enormous amount of social value, and if they destroy that value, fickle voters will punish them. The threat at hand is if politicians allow themselves to be seduced by the simplistic policy recommendations of the populists.

Applying the right tool to the job

Antitrust is a seductive tool to use against politically disfavored companies. It is an arcane area of law which, to the average observer, will be just so much legalese. It is, therefore, relatively easy to covertly import broader social preferences through antitrust action and pretend that the ends of the law aren’t being corrupted. 

But this would be a mistake. 

The complicated problem with the big tech companies is that they indeed could be part of a broader set of social ills mentioned above. Its complicated because it’s highly unlikely that these platforms cause the problems in society, or that any convenient legal tool like antitrust will do much to actually remedy the problems we struggle with. 

Antitrust is a goal-focused body of law, and the goal it seeks—optimizing consumer welfare—is distinctly outside of the populist agenda. The real danger in the populist campaign is not just the social losses we will incur if they successfully smash productive firms, but the long term harm to the rule of law. 

The American system of law is fundamentally predicated on an idea of promulgating rules of general applicability, and resorting to sector- or issue-specific regulations when those general bodies of law are found to be inapplicable or ineffective. 

Banking regulation is a prime example. Banks are subject to general regulation from entities like the FDIC and the Federal Reserve, but, for particular issues, are subject to other agencies and laws. Requirements for deterring money laundering, customer privacy obligations, and rules mandating the separation of commercial banking from investment activities all were enacted through specific legislation aimed to tailor the regulatory regime that banks faced. 

Under many of the same theories being propounded by the populists, antitrust should have been used for at least some of these ends. Couldn’t you frame the “problem” of mixing commercial banking and investment as one of impermissible integration that harms the competitive process? Wouldn’t concerns for the privacy of bank consumers sound in exactly the same manner as that proposed by advocates who claim that concentrated industries lack the incentive to properly include privacy as a dimension of product quality?

But if we hew to rigorous interpretation of competition policy, the problem for critics is that their claims that actually sound in antitrust – that Amazon predatorily prices, or Google engages in anticompetitive tying, for example – are highly speculative and not at all an easy play if pressed in litigation. So they try “new” theories of antitrust as a way to achieve preferred policy ends. Changing well accepted doctrine, such as removing the recoupement requirement from predatory pricing in order to favor small firms, or introducing broad privacy or data sharing obligations as part of competition “remedies”, is a terrible path for the stability of society and the health of the rule of law. 

Concerns about privacy, hate speech, and, more broadly, the integrity of the democratic process are critical issues to wrestle with. But these aren’t antitrust problems. If we lived in a different sort of society, where the rule of law meant far less than it does here, its conceivable that we could use whatever legal tool was at hand to right the wrongs of society. But this isn’t a good answer if you take seriously constitutional design; allowing antitrust law to “solve” broader social problems is to suborn Congress in giving away its power to a relatively opaque enforcement process. 

We should not have our constitution redesigned by antitrust lawyers.